According to a Monday report (Google Translate) by Danish public broadcaster DR, the Danish Ministry of Taxation is currently in negotiations with Microsoft and the Internal Revenue Service (the tax authority in the United States). The Ministry hopes to gain back the money that the Danish government claims it’s owed.

Representatives from both Microsoft and the Internal Revenue Service declined to comment on this story. The Danish Ministry of Taxation did not respond immediately to a request for comment.

“If [the tax authority] were to get their hands on the money, that would amount to financing a new super hospital, the next Silkeborg Motorway between Herning and Aarhus, or 15,000 teachers in primary schools.” DR reported.

As we’ve reported before, this means that foreign profits can be attributed to the offshore subsidiary rather than to the actual corporate headquarters. While subsidiaries are supposed to pay “arm’s length” prices, there’s an incentive to set those prices as low as possible as a way to shift profits overseas, where tax rates are lower.

Companies can arrange for secret deals with the Internal Revenue Service that dictate the terms of such transfer pricing under what’s called an “advanced pricing agreement.” Google got its approval in 2006.

It's likely Microsoft could have used a legal technique known as a "Double Irish." Many other large companies (including Amazon, Apple, Google and others) use this tactic to create complicated shell companies and tax loopholes that allow them to minimize their tax burden in the United States, Ireland, the Netherlands, and elsewhere.

The beginnings of a crackdown?

“It seems like the biggest problem here will be the one that tends to plague these transfer pricing problems: finding a comparable transaction or otherwise figuring out an objective price for the transaction,” Samuel Brunson, a professor of tax law at Loyola University Chicago, told Ars.

“If the software is sui generis—and I suspect Microsoft would argue that it is—what goes into the price is a whole lot harder to figure out. The survey data I've seen says that corporate tax directors generally consider transfer pricing one of the most pressing international tax concerns they have, and it doesn't surprise me that governments are looking to it to increase their revenues, too.”

Promoted Comments

Microsoft and the other hardware and software companies ought to start charging governments for the increase in productivity derived from computers.

After all, a more productive labor force earns higher incomes and pays more taxes to said governments. It's only fair that software companies participate from the increased efficiencies. Sounds ridiculous? That's exactly what governments are doing.

That does sound ridiculous but not in the way I think you meant it. Will car companies charge governments for the increased productivity of a workforce able to work further than they can walk in the morning? Or lightbulb manufacturers for increased productivity of a workforce able to continue after sundown? That is a pretty ill-reasoned argument to say the least.

Also, let's stop with this Microsoft ARE computing. They sell an OS, an Office suite and some other products. They are not COMPUTERS just as all smartphones are not iPhones, all networking is not Cisco, or all consoles are not Nintendo, etc.

They sell software and products. They recieve money. They pay taxes on that money. They are not special. I'm not sure how much more basic it can get. They are not charity, they are a business and deserve to be treated as such. And that includes taxation by the relevant authorities where they do business, not just backroom deals with the US government.

Share this story

Cyrus Farivar
Cyrus is a Senior Tech Policy Reporter at Ars Technica, and is also a radio producer and author. His latest book, Habeas Data, about the legal cases over the last 50 years that have had an outsized impact on surveillance and privacy law in America, is out now from Melville House. He is based in Oakland, California. Emailcyrus.farivar@arstechnica.com//Twitter@cfarivar